By: Jay Zagorski of The Conversation
Stocks, which only recently were practically hitting a new record every other day, suddenly seem to be in free fall.
Global stock markets plunged on Feb. 5, continuing the already precipitous decline from the week before. The Dow Jones industrial average, one of the most widely followed indexes, fell by almost 1,200 points, a 4.6 percent loss and the biggest point decline on record. Put another way, the world’s 500 richest people lost about US$114 billion in a single day.
Since the Dow’s record peak of 26,617 on Jan. 26, the index has fallen almost 9 percent. This brings it close to what is known as a “correction,” which is often described as a fall of 10 percent. Corrections are simply a large enough fall in stock prices to get some people to believe the market’s upward trajectory has stopped. We’ll be in a “bear” market if losses reach 20 percent.
What does this mean for investors and the rest of us? In my view, there are three important ideas to keep in mind as we assess the impact of a plunging stock market on the economy and our wallets.
First, the stock market often makes very dramatic moves in a short period of time, and extreme volatility like Monday’s occasionally occurs. One of the most famous market plunges occurred in 1929, at the start of the Great Depression.
On Oct. 25 1929, a Friday, the Dow Jones industrial average closed at 301. The following Monday, dubbed “Black Monday” in trading lore, the Dow closed at 260, a drop of 13.5 percent. Then the next day, called “Black Tuesday,” the Dow fell to 230 points, a loss of 11.7 percent.
People were in a panic after only two days of steep losses. On Wednesday, which has no moniker, the Dow reversed course and rose up to 259. This rise almost entirely wiped out the previous day’s fall.